TRADERS: The 'Flash Crash' arrest is a joke

This is the house where
Navinder Sarao traded his account.Reuters/ Neil Hall

Traders we spoke with think the arrest of a 36-year-old UK-based
trader for his alleged involvement in the 2010 "Flash Crash" is a
total joke.

On Tuesday, futures trader Navinder Singh Sarao
was arrested in London in connection with charges in the US.

He's been charged on one count of wire fraud, 10 counts of
commodities fraud, 10 counts of commodities manipulation, and one
count of
"spoofing" — buying or selling large orders with the intent
to cancel.

According to the complaint, Sarao allegedly used an algorithm to
manipulate the market for E-Mini S&P 500 futures contracts,
or "E-Minis," on the Chicago Mercantile Exchange (CME).

"Sarao’s alleged manipulation earned him significant profits and
contributed to a major drop in the U.S. stock market on May 6,
2010, that came to be known as the 'Flash Crash,'" the
Department of Justice said in a statement. "On that date,
the Dow Jones Industrial Average fell by approximately 600 points
in a five-minute span, following a drop in the price of E-Minis."

Here's how futures traders reacted (emphasis added):

"Well what he did is a problem for CME, which they are
cleaning up. They have been cracking down over past 6 months
hard. He was not the cause of the flash crash. That is a
joke," one New York-based trader said. (The problem the
trader is referring to is "spoofing.")

"[Spoofing] is a separate issue, but spoofing doesn't happen
risk free," another trader said. "If someone is in the market
spoofing it they are taking the chance that a real buyer can lift
their contracts and all of the sudden they are seriously short or
long a position they never wanted to be in ... which is
why the market is normally a better liberator of these things
than regulators. If I'm a big fund and see
someone doing this, I may try and wait for the right time and
then buy 5,000 contracts when I see them doing this if I know I
need to buy a lot more and squeeze him as a short. That's far
more painful to him than a one time fine."

A New York-based quant trader said that regulators absolutely
should be tracking spoofing. However, the trader thinks
regulators needed someone to blame this time. "My gut
says he is basically being made a target because they need
someone to blame for the 'Flash Crash.' The trader
thinks that this "case smells of political PR"
and that "someone somewhere is really working hard on their
career."

The quant also pointed out that the complaint said Sarao had
been using the trading algo before the "Flash Crash" and in the
years after. If he was the cause of the crash, why did we only
have one crash in that period?

One Midwest-based trader said it was "impossible to have been caused by one
trader or even exaggerated." He added, "It's
insanely entertaining to think an individual or an entity caused
that day."

The trader explained that there were "far too many other
markets losing liquidity just as fast and in fact FASTER that
it's LUDICROUS to think one individual in just the EMINI caused
it. Insanely [reckless] in fact."

"To blame them, to blame them for the 'Flash Crash' is
absolutely ridiculous. It's beyond ridiculous," one
trader said. "If anything, OK someone is trying to game the
market here. It's f------ stupid."

This is the first case brought forth related to the Flash Crash.
Traders aren't the only ones showing skepticism.

The trader explained this is a "very fast market." He speculated
that it would be difficult to just look at the order book and see
if someone is intentionally cancelling orders. It's normal for
traders to cancel. "You'd
have to look at it and see a continuous behavior," the trader
said.

"Why is it that he had not been caught? ... They noticed but no
action was taken for years?"

Sarao was the sole employee of UK-based Nav Sarao Futures
Limited. It appears that he traded his personal
account from
his home in a London suburb.

If you're a futures trader, we'd love to hear your thoughts.
Feel free to reach out to jlaroche@businessinsider.com.